Huntsman Corporation

Greetings and welcome to the Huntsman Corporation's first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ivan Mercusa, Vice President, Investor Relations for Huntsman Corporation. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. Welcome to Huntsman's first quarter 2021 earnings call. Joining us on the call today are Peter Huntsman, Chairman, President, CEO, Sean Douglas, Executive Vice President, CFO, and Tony Hankins, President of Polyurethanes. This morning, before the market opened, we released our earnings for the first quarter 2021 via press release and posted it to our website, Huntsman.com. We also posted a set of slides on our website, which we will use on this call this morning while presenting our results. During the call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements and, while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website, Huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman and President, CEO.

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's turn to slide number three. Adjusted EBITDA for our polyurethane division in the first quarter was $207 million versus $84 million of a year ago. This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily in the component end of our business, which more than offset the approximate $10 million EBITDA impact related to winter storm URI that we experienced in February. Our MDI volumes declined approximately 7% versus the prior year's first quarter, primarily due to a fourth quarter 2020 TNI at our Geismar, Louisiana, which we deferred to this year's first quarter. Some impact related to winter storm Uri and our planned need to build inventory ahead of our scheduled Rotterdam turnaround. However, improved margins more than offset the decline in volumes. We will note that our differentiated MDI volumes, which include our automotive, elastomers, and spray foam businesses, were up 4% for the quarter. Demand trends in our core markets of construction and automotive have led to solid underlying growth in the quarter, when excluding the impact from storms and turnarounds, Our insulation businesses, including spray foam and our composite wood product business, remain solid. Its markets, such as North American residential construction and renovation, remain strong. Many have inquired as to the impact the reported ongoing chip shortage in the automotive industry is having on our polyurethane business. By the end of the first quarter, we haven't seen any impact to our customers as our automotive business was up 12% globally compared to the previous year. We believe this has been a result of our being more European-centric and supplying a market segment that is more skewed towards luxury automotive. So far in the second quarter, we are seeing a 2% to 3% drop in volume due to chip-related slowdowns. We've reallocated this volume of MDI to other areas, and expect to earn similar margins. We're also pleased to see a strong recovery in our global elastomer's business, largely comprised of footwear, along with other specialty end use and industrial related markets. The improvement in footwear is being helped by the gradual reopening of economies, which is having a positive effect on the retail markets. The industrial side of our elastomer's business correlates somewhat with global PMIs, which have continued to expand around the world. Short-term and long-term fundamentals of our polyurethane business remains positive. We are benefiting from some level of inventory restock, and our own inventory levels remain below normal levels for this time of year. We're keeping an eye on the evolving reoccurrences of COVID pandemics around various regions of the world, overall demand reflected within our order books remained solid. Our margin within the first quarter benefited more than we had anticipated from ongoing tight conditions within the industry. In addition to various planned turnarounds within the industry, unscheduled outages compounded the situation. We were fortunate that our Geismar Louisiana facility was able to continue largely uninterrupted while others were forced to declare force majeure due to damages sustained by winter storm Uri. As previously mentioned, we estimate the negative impact from Uri on polyurethanes was approximately $10 million. This was largely a result of supply chain and raw material constraints. This is a testament to the team that we have at our Geisman Louisiana facility and their ability to work through these conditions in a safe manner to keep it running. Currently in the Americas, we believe most of the industry capacity is in the process of returning back to full operating rates. Business conditions in China remain solid. Our margins in the first quarter exceeded our expectations. Given the completion of local turnarounds and some announced capacity additions within China, we've seen margins recently recede a bit, though they are generally firm. Within our POMTB joint venture with Sinopec in China, where we own 49%. We benefited from very strong margins, largely the result of industry outages and stronger than expected demand in the quarter. As of the current moment, and once in every four year multi-facility turnaround at our Rotterdam MDI plant is nearing completion. We are highly dependent on many other chemical companies conducting turnarounds and everyone meeting a pre-agreed synchronized timeline to restart. Due to some delays with a third-party supplier, our startup is delayed. As a result, the total estimated EBITDA impact from this turnaround is now estimated to be around $25 million versus the initial $15 million estimate we gave you last quarter. Our facility is about ready to start back up. We're hopeful that we do not experience any further delays that are outside our control. Putting it all together, we remain very positive about the trends that we are seeing in polyurethanes globally. Demand is good. The industry is balanced. Substitution will continue, and areas driven by sustainable solutions such as energy efficiency are expected to follow trends that will have a very positive impact on the business for the foreseeable future. Looking into the second quarter, we see seasonal strength being partially offset by turnaround costs and potentially lower MDI margins in Asia. We would expect the second quarter adjusted EBITDA to be around 5% stronger than the first quarter dependent upon the Rotterdam TNI, which would be up significantly versus a year ago, period. Let's turn to slide number four. The performance product segment reported adjusted EBITDA of $63 million compared to $58 million in last year's first quarter. We saw growth in our Asia business and strong demand and margins for most of our division's products. This combined with lower fixed costs more than offset the approximate $14 million of headwind that resulted in wind or storm yearning. Total volume for the division declined 3% due largely to this storm and due to the recent discontinuation of certain polling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year over year, leading the way with strong demand in our performance and means portfolio, largely in our sustainability-related products, such as the means that are sold into VOC-free polyurethane catalysts and into the wind market. Growth in the construction markets have also benefited our means that go into coatings and adhesives, as well as the Malacan hydride business that serves the UPR market. Volumes increased 6% year-over-year within our Malacan hydride business. Raw material costs have been rising, but we've been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This, combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5 to 10 percent for performance products. Let's turn to slide number five. Our advanced materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry. As a result, our aerospace sales were down approximately 40% year over year. It's a primary reason that our adjusted EBITDA declined year over year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated. When excluding aerospace, the underlying volumes of our other core specialty businesses experience growth year over year from improved trends as well as positive contribution from our recent acquisition of CDC thermal set specialties and Gabriel Performance products. Our non-aerospace business, EBITDA, grew 8.5% over last year. while our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track, and we're confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses. Looking toward the second half of 2021 with improving fundamentals as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced material division to be about 10% better than the first quarter. Let's move to slide number six. Our textile effects division reported an adjusted EBITDA of $25 million for the first quarter, which is 25% above the comparable prior year period. Volumes in the quarter grew 10%. We saw an improvement in volumes across nearly every product category, including formal apparel, which has lagged since the onset of the pandemic when consumers began working from home, tired in sweats and old leisure suits. We believe that the broad base recovery in volumes reflect pent-up demand from consumers, in step with reopening of economies as mobility restrictions are lifted. consumer sentiment in the US and Europe has increased, as well as retail store sales in each region. We believe inventories in the retail channel are still below historical levels, supporting a very strong order book. Sustainability within this channel also remains a focus for our customers. This macro trend continues to favor our leading technologies that are environmentally friendly in areas such as water reduction, which continues to gain share. Our textile effects division has come through two challenging years, including facing trade wars in 2019, followed by the global pandemic of 2020. We believe that this business is quickly returning back to where it was in 2018, and that should be reflected in our second quarter results as we move throughout the rest of the year. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer.